November 4, 2005

STAYED AT LEAST ONE TERM TOO LONG:

Federal Reserve 'puzzled' on rates (Patrice Hill, November 4, 2005, THE WASHINGTON TIMES)

Federal Reserve Chairman Alan Greenspan said yesterday that long-term interest rates are no longer responding as they have in the past to the central bank's rate increases or to large federal budget deficits.

Although he warned that the rates on 10-year to 30-year mortgages and bonds may have a "delayed" reaction and jump in response to mounting deficits, he conceded the central bank remains "puzzled" as to why they remain so low.

The Fed no longer has much control over these rates, which have been stimulating a long-running housing boom, most likely because global market forces have become stronger than the Fed and are pushing rates lower in response to global deflation and excess savings overseas, he said in testimony before the Joint Economic Committee of Congress.

"It was a great surprise to us" and was not anticipated when the Fed started raising rates last year, he said. "We're just now beginning to understand" the reasons.

Odd that Mr. Greenspan can have lived through the '80s and '90s yet still think it's the '70s. The deficits don't matter and there's deflationary pressure not inflationary--end of conundrum.


MORE:
Productivity Up, Labor Costs Drop: Third-quarter data beat expectations, but the fact that wages trail inflation may be making workers uneasy. (Bill Sing, November 4, 2005, LA Times)

U.S. business productivity — measuring worker output per hour — surged at an annual rate of 4.1% in the July-to-September period, the Labor Department reported. It was the strongest increase in more than a year and far surpassed expectations.

Meanwhile, unit labor costs — what it costs businesses to produce a given output for a set amount of labor — declined at an annual rate of 0.5% in the quarter, the department said. It was the first drop in this key indicator of corporate profitability since the second quarter of 2004.

The results were "a remarkable achievement and a testimony to the flexibility of resources in the economy," said Brian Bethune, an economist for Global Insight, a research firm in Waltham, Mass. [...]

Strong productivity gains normally could support higher wages. But although growth in overall compensation — wages and benefits together — has surpassed inflation, wage boosts alone have not.


When stuff gets cheaper it doesn't cost more.

Posted by Orrin Judd at November 4, 2005 6:42 AM
Comments

Robert Musil has explained this a while ago: we wait for the Fed to spend the money on research to back it up. (It seems they only believe their own economists, sometimes).

Posted by: Arnold Williams at November 4, 2005 1:39 PM
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